Hifz ur Rab

The Moral Weight of Money and the Illusion of Inflation

Monetary manipulation is a foundational pillar that often sustains modern capitalist systems, yet its mechanics remain hidden from the average person. We can define monetary manipulation as the reduction in the actual quantity of what determines money’s purchasing power. Essentially, it is a decrease in the substance of what money is or what it represents.

While we often hear the term ‘inflation’ to describe a general increase in prices, this rise is typically caused by one of two factors. First, it can occur due to a change in the purchasing power of what the money symbolizes, often triggered by a deliberate reduction in the quantity of wealth it represents. This is the essence of monetary manipulation. Second, prices may rise due to a fall in purchasing power without any change in the quantity of the money itself. For instance, if gold becomes naturally cheaper because of a new supply, an Islamic Dinar made of 4.25 grams of gold will naturally buy less.

In this context, a price rise can be ‘real’, as seen in the second case, or it can be a mere ‘illusion’, as seen in the first. In an illusionary price rise, money is simply being reduced to a smaller quantity of wealth, thus buying fewer goods and services. If a price rise is real, it does not necessarily require compensation.

However, if the rise is the result of monetary manipulation, it must be corrected and compensated for to maintain fairness. It is arguably due to a period of intellectual stagnation that many have failed to realize that divine revelations regarding the ‘Balance of Justice’ apply to all forms of measurement, including the measurement of wealth.

The Quranic command to establish weight with justice and fall not short in the balance strictly prohibits anything that leads to faulty measurement. By extension, the manipulation of a common medium of exchange the market uses to determine just prices is strictly prohibited. Shari’ah requires that currency be a well-defined and reliable measure of wealth with a stable purchasing power. Consequently, a system of freely floating fiat money, which lacks this stability, finds little accommodating place in an ethical Islamic framework.

The Mechanics of Fiat Money and the Shrinking Basket of Value

The prevailing paper currency we use today is known as freely floating fiat money. These notes are essentially transferable warrants for a quantity of purchasing power determined by the market.

Despite the fact that this money consistently loses its value, people continue to use it because government mandates require its acceptance for all payments.

While these currencies were initially linked to gold-backed systems, that link has been completely destroyed. Today, the only reality of fiat money is the ‘basket’ of national products it can buy. The ‘weight’ of this money falls whenever the money supply is increased beyond the actual requirements of the economy. Secular governments generally do not recognize that a specific amount of money today should be equivalent to the same amount from five years ago. However, economic reality—as confirmed by scientific standards and practiced in real-term accounting worldwide—suggests that an equivalent amount must be calculated based on constant prices or a constant quantity of the national product basket.

To illustrate this, imagine an economy where only food, clothing, shelter, and gold are traded for currency. The market determines the price of these items based on supply and demand. If we define a unit of currency by the specific ratio of these goods it can buy—perhaps four packets of food, three of cloth, two of shelter, and one of gold—that basket becomes the only true reality of that money.

If the government prints more money and that same unit now only buys 90 grams of that basket instead of 100 grams, the ‘reality’ of the money has fallen by nearly 10 percent. Economists call this the rate of inflation, but it is effectively a manifestation of monetary manipulation. Because fiat money has no intrinsic value and its future purchasing power is unknown, using it as a fixed unit for credit or deferred transactions introduces a major element of uncertainty, known as Gharar.

Just as selling ten pieces of gold without specifying their weight would be prohibited due to lack of definition, conducting business using a currency that has no fixed weight of value creates an environment of instability and potential fraud.

Restoring Justice in Islamic Finance and Accounting

Research has shown that preferred Islamic modes of finance, such as Qard Hasan (interest-free loans), Mudarabah, and Musharakah (profit-sharing partnerships), become unjust and impractical when accounting is done in nominal terms—meaning, when no correction is made for the loss of money’s value. These systems are highly efficient and just, provided that the accounting is corrected to reflect monetary manipulation.

We must recognize that fiat money is essentially just a name; the real money is the equivalent national product basket it represents. If the weight of that basket is reduced by half, the money buys half as much. There is a strict similarity between a debased gold coin, where the gold content is reduced, and modern fiat money that loses its purchasing power. Therefore, a strict analogy applies. Shari’ah relies on realities rather than names. Since fiat money is continuously manipulated, the correct alternative is to use a fixed weight of its reality—the basket of goods—as the unit of account.

The stability of fiat money may seem acceptable over a week or a month, but over decades, it is a poor store of value, often losing more than 99 percent of its power over a century. This failure to maintain value leads to systemic corruption and acts as a nuisance to honest trade. If we treat money as the national product basket it represents, the accounting unit becomes a fixed quantity of that basket.

For example, to clear a loan today when the basket’s value has been halved, a borrower would need to return twice the nominal amount of currency to ensure the lender receives the same weight of wealth back. This approach aligns with the Shari’ah requirement for equality in weight between what is borrowed and what is returned. Ignoring this reality and relying on nominal paper values leads to widespread inefficiency and social disaster. By establishing currency as a defined and stable quantity of wealth, we fulfil an essential condition for justice and sustained economic growth.